How to tell a credible ICO from scam
When a company/startup decides to attract investments for blockchain product development and promotion, it issues tokens and this process is called ICO, or Initial Coin Offering. Issued tokens can have different functions. If ICO implies that tokens should be used as a future access to the company’s product, it issues utility, aka user tokens. Fundraisers use them as digital coupons for the product they’re building which will later be converted into a new cryptocurrency to be used with the product.
If a crypto token is supposed to serve as an external tradable asset, it’s defined as a security token and becomes subject to security regulations. If a company meets all regulatory obligations, it can endow the token with various functions such as the ability to issue tokens that will serve as company stock shares.
To invest or not to invest in tokens?
Unfortunately, there’s no proper answer to this question. Choosing a reliable ICO project out of 400 campaigns running simultaneously seems like a tedious and time-consuming task. I would like to offer an alternative approach. First, learn some basic guidelines to sort out ICOs that aren’t worth your attention or “smell” like a scam, and focus on choosing between those that managed to get through this “basic” examination. The method is based on three fundamental questions — why, who, and how?
Do your research and try to get answers to the following questions:
What user problems will this project solve? Do these problems really exist? Is blockchain able to solve them? Is blockchain really needed at all for solving these issues? Are there similar projects already available and how will this one make a difference in the niche?
Find out who is behind the project: who are founders, top managers, partners, and advisors? Look each of them up on LinkedIn and Google, are they industry veterans or pioneers? Are they opinion leaders with thousands of followers in social media? Or are they newbies coming out of the blue sky? Is there at least one notable advisor or partner onboard? In short, try to answer just 1 question: Will these people risk their reputation and track record to put their names next to the project that’s a scam or has a high potential to fail or never deliver? If the answer is — yes or quite likely, better stay away from such an ICO.
Figure out whether the project idea is feasible from technology and deployment perspective.
One of the main issues with startups and ICOs today is that the proposed ideas look truly revolutionary and great and can quickly attract supporters, but most of them can’t be delivered due to technical limitations and other factors. According to a recent survey, 84 out of 100 ICO projects are never delivered, and one of the key reasons is the lack of technology to execute.
Make sure ICO has a good white paper put in place that details HOW exactly the project will be executed. Even if you have little understanding of the topic and are driven solely by the project idea, an obscure and too general white paper can be an indication of severe problems in the structure of the enterprise.
Now I’m cooperating with a very interesting blockchain project in gaming called DMarket which is the world’s first cross-game marketplace for trading in-game items and turning them into the real assets. DMarket is listed among the Top 3 Gold Level ICO projects 2017 on TopICOList and it has one of the most detailed, clear and easy to understand white papers I’ve ever seen, seriously (see it for yourself!). Based on it, I’ve figured the basic characteristics to look for in a good white paper:
- Easy navigation and decent UX;
- No typos and grammar mistakes;
- Diagrams and pictures are relevant and informative;
- It contains a detailed analysis of the current market state with relevant statistics and a strong analytical component;
- It describes all functional features and how they’ll be executed and deployed;
- It shows the benefits for the target audience and partners;
- The document includes a clean roadmap and easy-to-read “Use of Funds” section;
- The white paper lists all project key team members and their background;
- It contains a clear and comprehensive project monetization/revenue strategy.
One more sign of a quality ICO project is a roadmap with clearly defined milestones and whether or not the project meets them and adheres to the roadmap at this very point of time.
Know Your Customer (KYC)
And yes, do pay your attention to whether the project implements KYC or not! That should be one of the main decisive factors in your ICO choice. “Know Your Customer”, or KYC is a regular practice for token sale as well as a requirement of both banks and cryptocurrency exchanges. KYC allows for the exclusion of duplicate applications, fake accounts and helps prevent scammers from using contributors’ personal data. Furthermore, it provides the legal framework for use of funds after token sale completion as required by the U.S. legislation.
KYC implementation indicates project’s transparency, security, and legitimacy. Long story short, to be able to spend funds attracted during ICO, fundraiser needs to convert them into fiat money and to do so they need to verify and confirm the origin of funds. KYC helps make sure pledges came from legitimate countries only and exclude accounts from countries that ban citizens from contributing to ICO projects.
In conclusion, it’s totally up to you whether to invest in tokens or not, but I’d suggest that you do a thorough background check prior to making a decision. There’re many ICO reviews on YouTube, so watch them, be part of a Reddit community, ask questions on Quora, be active in LinkedIn groups and all of these activities will definitely help you avoid investing in scam ICO and choose the right one!
Also, check out why generous bonuses at the token sale may indicate a scam project.
Disclaimer: I’m not an investment specialist and I’m pretty new to the ICO topic myself, so this article should in no case be deemed as an investment advice.